Quick Facts

Nepal’s economic freedom score is 51.3, making its economy the 152nd freest in the 2015 Index. Its score has increased by 1.2 points since last year, driven mainly by improvements in freedom from corruption and business freedom that outweigh a decline in monetary freedom. Nepal is ranked 34th out of 42 countries in the Asia–Pacific region, and its score remains below the world and regional averages.

Much of Nepal’s population has been trapped in poverty for years. A failure to implement consistent economic reforms has perpetuated this condition and left the Nepalese economy barely above the “repressed” category in terms of economic freedom.

Although economic freedom has advanced by 1.2 points over the past five years, seven of the 10 categories measured still score below the global averages. Improvements have occurred only in freedom from corruption and business freedom. The rule of law is not evenly enforced, and this has deterred investors from investing in Nepal’s promising hydroelectric industry. Even small entrepreneurs and laborers are inhibited from entering the formal marketplace due to inefficient and excessive regulation.

Background

Eight years after the end of a Maoist insurgency and abolition of the monarchy, Nepal still has only an interim constitution. In May 2012, the first Constituent Assembly was dissolved after failing to produce a new constitution. Elections were postponed for nearly 18 months. In November 2013, the Nepali Congress party won enough seats to form a coalition government headed by Prime Minister Sushi Koirala, who pledged to complete a new constitution within a year with a goal of making the transition from a constitutional monarchy to a federal republic. The reintegration of former Maoist fighters into the national army remains controversial. A poor, landlocked country bordering the Himalayan Mountains, Nepal attracts little foreign direct investment. Agriculture accounts for one-third of GDP.

Corruption is endemic in politics and government. Many legislators have been accused or convicted of corruption, but high-level officials are rarely prosecuted. Graft is particularly prevalent in the judiciary, with payoffs to judges for favorable rulings, and in the police force, which has been accused of extensive involvement in organized crime. Protections for property rights are not enforced effectively.

Nepal’s top individual and corporate income tax rates are 25 percent. Other taxes include a value-added tax and a property tax. The overall tax burden is equivalent to 13.9 percent of domestic income. Government expenditures equal 19.2 percent of gross domestic product, and public debt stands at 31 percent of the size of the domestic economy.

Commercial regulations are not implemented or enforced effectively. Economic diversification has lagged, and much private-sector activity takes place outside of the formal economy. Labor regulations, although not fully enforced, are relatively rigid and outmoded. Inflation increased in late 2013 due to higher import bills caused by depreciation of the Nepali rupee against the Chinese yuan and the U.S. dollar.

Nepal’s average tariff rate is 11.6 percent. Some goods may be subject to export taxes, and beef imports are restricted. New foreign investment is screened by the government. The financial sector, dominated by banking, remains underdeveloped, and a full range of modern financing tools is not readily available. Capital transactions and foreign exchange accounts are also limited.